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From Securities Regulation Daily, November 11, 2013

Bear Stearns liquidators sue S&P, Moody’s, and Fitch

By Anne Sherry, J.D.

The liquidators of two Bear Stearns Funds (Funds) that invested in structured finance securities filed a fraud complaint against S&P, Moody’s, and Fitch. The complaint, which fills nearly 150 pages, tells the story of a “house of cards” built by the credit rating agencies, the collapse of which resulted in the Funds’ losing more than $1 billion. The suit is the latest in a wave of litigation against credit rating agencies by financial institutions, shareholders, and state governments (Varga v. McGraw Hill Financial, Inc., November 11, 2013).

Funds’ losses. The Bear Stearns Funds were structured to invest at least 90 percent of their portfolios in high-grade securities — those rated AAA, AA, or AA or equivalent. The complaint alleges that the credit rating agencies fraudulently upheld AAA or AA ratings on structured finance products despite turmoil in the housing market; as a result of the high ratings, the Funds maintained their investment in those products. The Funds suffered more than $1 billion in losses when the market collapsed. “Put simply, the Rating Agencies engaged in a massive fraud upon the market, and specifically upon the Funds,” the complaint alleged.

Alleged fraud. The complaint’s single count is for common law fraud on the basis that the rating agencies knowingly made false and misleading representations and omissions on which the Funds reasonably relied, to their detriment. According to the plaintiffs, market participants necessarily relied on the ratings and on the rating agencies’ representations because the underlying loan-level information was opaque; often, issuers provided confidential information only to the rating agencies and did not disseminate this information to the public at all.

The complaint asserts that the rating agencies represented that their ratings were the independent, objective results of high-quality credit analyses. In reality, the defendants allegedly relaxed their rating standards to protect their position in the market and to appease the issuers of the securities, which paid them for the ratings. The rating agencies allegedly delayed development and implementation of new ratings models and surveillance to avoid ratings downgrades, the complaint continues. In particular, they disregarded information regarding the deterioration of the housing market and corresponding deterioration of the mortgages underlying the structured finance products they rated, the plaintiffs allege.

The case is No. 652410/2013.

Attorneys: James C. McCarroll (Reed Smith LLP) for Geoffrey Varga.

Companies: McGraw Hill Financial, Inc.; Standard & Poor’s Financial Services LLC; Moody’s Corp.; Fitch Group Inc.

MainStory: TopStory CreditRatingAgencies FraudManipulation NewYorkNews

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